The Most Important Insurance We Never Buy

In short, gold-backed currencies force responsible governments to live within their means.

That is precisely why, back in 1971, Richard Nixon was forced to nullify the Bretton Woods agreement, which was signed at the end of World War II, and permanently close the gold window.

As you might expect, Nixon felt he had no choice. The US had been living well beyond its means for more than a decade, printing lots of federal reserve notes to pay for expensive endeavors the country couldn’t truly afford, like the Vietnam War and LBJ’s so-called “War on Poverty.” That, in turn, led to an increasingly devalued US dollar. So, in order to preserve their wealth, many of the world’s central banks — led by West Germany, France and Switzerland — began redeeming their rapidly depreciating US dollars for the gold stored in Fort Knox; so much so that by the time 1971 rolled around, America had only half the gold reserves it did in 1960. In fact, it’s been said that the gold outflow was so rapid, if it continued, America’s gold reserves would have been completely consumed within a few more years.

Of course, instead of closing the gold window and abandoning Bretton Woods, the US could have simply scaled back its spending — but that’s what happens when critical financial decisions are left to profligate politicians and their complicit central bankers.

Since abandoning its ties to gold in 1971, America has greatly expanded the size of the federal government, destroying the dollar’s utility as a store of value in the process — so much so that it takes $615 today to buy the same basket of goods and services that $100 would fetch in 1971.

The bad news is, savers, retirees and other folks on fixed incomes depend on their currency to hold its value; and if currencies depreciate too quickly, it leads to lower living standards — for almost everyone.

Over the past decade, the Fed’s printing presses have conjured more than $4 trillion in new money out of thin air — and that doesn’t bode well for the US dollar’s value and continued confidence in its future.

Unlike paper money, precious metals can’t be created out of thin air, and that makes them proven instruments of wealth protection; it’s why some people choose to keep a portion of their savings in gold and silver.

How secure are they?

Well, last week, the national average price for a gallon of gasoline was approximately $2.85 per gallon. Meanwhile, the current melt value of a genuine silver Washington quarter minted between 1932 and 1964 is hovering around — you guessed it — $2.85, which means that a silver quarter that was used to buy a gallon of gas way back in 1964 for 25 cents per gallon can still buy a gallon of gas 54 years later. And it will 54 years from now too.

Some people love to point out that precious metals pay no interest, have no earnings, provide no yield, and spin off no cash flow — but that’s also their biggest strength! Precious metals serve no master, so they don’t rely on any counterparty to remain solvent. As such, gold and silver are the ultimate collateral, which makes them the perfect insurance policy against currency devaluation, or a total loss of confidence that results in hyperinflation.

Critics who don’t understand the value of holding physical gold and silver argue that precious metal prices go up and down — but that misses the point. Whether the price rises or falls, gold and silver’s purchasing power never changes in real terms. What’s changing is the value of the currency.

Remember the gasoline example? That humble Washington silver quarter will always buy a gallon of gas or a couple loaves of bread — regardless of whether the price of silver rises, or even falls precipitously!

Those who believe in personal responsibility don’t buy precious metals to make money — they buy gold and silver to protect the cash and other paper assets they already have. Even so, I strongly suspect that less than 1 in 100 people, for whatever reason, actually bother.

Now, like any insurance, you may never need to rely on your gold and silver, in which case you would simply pass it on to your children and grandchildren. Then again, if the day ever comes when you do have to use it, you’ll be glad you had the foresight to protect yourself.

So, whether or not you find yourself laying awake at night worrying about the safety of your hard-earned money, including your retirement nest egg, consider accumulating a little wealth insurance — even if it’s just one American Silver Eagle or Canadian Silver Maple Leaf per month. I promise you’ll sleep a whole lot better at night.

Generally speaking, the answer is yes, although there may be a short lag period after large sudden movements in the price of precious metals or commodities.

That’s not to say that, over time, there aren’t slight disparities above or below the long-term average prices. While relatively rare, there are also periods of time where the disparity can be a bit extreme (especially with respect to oil). For example, since World War II ended, the historical average price ratio of barrels of oil to one ounce of gold has usually hovered in a tight range between 12 and 15. Although it averaged about 22 from 1986-2000 (which means folks actually got more bang for their gold than the historical average). The ratio has rarely been less than 12.

If you do buy them, please purchase directly from the government mints and not through collectors, dealers or scams like the Franklin Mint. You are buying the coins for their metal value and not for “limited edition” reasons. Everyone who buys them holds on to them so they don’t increase in collectibility (is that a word? it’s late) because it’d be foolish to spend at their face value.

You make a great point, JW, about staying away from collectible coins. Just stick to the standard issue American Silver and Gold Eagles, Krugerrands, or Canadian Gold and Silver Maple Leafs.

I will say that there are reputable online dealers out there including Colorado Gold, APMEX, CNI and Kitco.

Another option is to buy so-called “junk” silver — that is, silver American dimes, quarters and half-dollars that were minted prior to 1965. You can buy junk silver from some of the bigger online bullion dealers such as APMEX and Kitco — when they are in stock, that is. (In case you are wondering, “junk” silver is not as pure as, say, newly minted American Silver Eagles — but their silver content has a known-value that is accepted everywhere.)

Hi, Len. Love your posts, dude. We have a lot of silver rounds from various mints, such as Sunshine Mint in Idaho. I would like to start getting some Silver Eagles, though, but they do run a couple dollars more than the rounds. I sure hope my rounds are “reputable” (they aren’t collectibles, just plain old rounds with the name of the mint and the silver content). In your opinion, is it a waste of time to collect rounds and bars?

Thanks, Matt. To answer your question, no I don’t think it is a waste of time to collect rounds and bars; for me, it’s simply a matter of preference. I do collect bars from the Royal Canadian Mint. I prefer Silver Eagles because (I hope) they are easily recognizable. Of course, the drawback is the higher premium.

10

Tnandysays

Strike Tulving from the list, Len. He went bankrupt (for the second time) a few years back, taking some 15 million in customer money with him the 2nd time around. Although I did buy some from him years before with no problems, the last folks before his collapse this time were left out in the cold.

(That comment was made prior to Tulving going belly up. I edited them out of the comment.)

12

Ricksays

What a good explanation for the reasons to own precious metals. Based on your suggestions we have been buying it slowly over the last year. Our little stash is growing and we feel more secure and prepared for an economic upheaval that we are certain is on the horizon. Thanks Len.

Gold is an excellent hedge against inflation.
Its also a tangible asset that will always have value. Will a paper dollar always have a value ?
Gold is also a great preserver of wealth during periods of economic and political turmoil.
Americans might need a bit of gold in their portfolios if the crazy politicians cant sort out their debt wrangles.

Great article! Gold has been taking such a beating lately that most have given up on it. Good to see I’m not the only one who still believes in it. In fact, I fully expect it to set a new all-time high in 2014. Go gold go!

Hi Len, I had started writing a blog about gold being a good hedge against inflation… then I ran across this terrific blog. I’d like to copy it and change your silver example to one I have with gold. I wanted to ask permission first and of course I’ll give you the credit and citing if you are ok with this.

Hi Nick, you’re thinking like someone who buys gold as an investment. Gold and silver are NOT investments; they’re insurance.

If “the price of gold” falls by $650 per ounce, then yes, the US dollar became more valuable compared to the gold benchmark. But here’s the thing: Thousands of years of human history have proven that the purchasing power of gold remains relatively stable (it will always buy the same approximate amount of cattle, wheat, oil, etc.) over time, regardless of its price in the currency du jour. You certainly can’t say that for fiat money like the US dollar.

All fiat money, on the other hand, eventually returns to its natural intrinsic value: zero! When that day comes, people who have gold will be thankful they had insurance. Check this post for a real-world example of how precious metals act as insurance in the event of currency collapse:

Ideally, you want to buy your insurance as cheaply as possible. Falling precious metals prices are a gift — not something to dread. If/when there is a currency collapse, gold and silver will help keep you whole — regardless of their price just prior to the collapse. Who knows, they may even see you end up ahead of the game.

Always — and I mean ALWAYS — buy the physical coin. Those precious metals funds are nothing but paper promises, and if the financial system implodes, the paper promises backing those precious metals funds will implode with it.

John, I believe that if the powers that be do not preemptively reset the financial system on their own, we’ll eventually see a very short-term deflationary collapse immediately followed by a MASSIVE unprecedented money printing campaign by the Fed which will result in a complete loss of confidence in the US dollar — in other words hyperinflation. Countries that are deep in debt — like the US, Japan, and most of Europe are — must avoid deflation at all costs (even if it means igniting hyperinflation and the death of the currency) because deflation exacerbates the debt burden by making it more expensive. So the world’s central banks will have no choice but to print their way out deflation.

Again, however, the price of gold is irrelevant. Until a financial reset occurs, gold at $250 per ounce will essentially buy the same goods and services that gold at $1300 or $2000 an ounce will buy. After the reset, I expect that it will buy much much more.

Depending on where you live, how you protect your wealth is different. In the USA we would purchase Gold or Silver. When I visit family in Colombia or Brasil they always ask us to exchange our currency with them so they can buy our Dollars in exchange for their currency. I am cool with that because I get a better rate.

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